Ambac

My comment yesterday about Goldman Sachs dubious business practice of hedging against investments it was selling to investors seems to reflect a more widely held view than I realized – it popped up in Gillian Tett’s normally sober commentary in the Financial Times today..

Recall the issue: in the fairly narrow confines of the mortgage backed securities market it appears as if banks like Goldman – and I should point out that all the ‘big six’ seem to have been just as unethical – peddled securities and then, simultaneously, took out insurance against the loss of value in them. To say this is dubious is to give the banks a big free pass.

The plot thickens when we also recall that the insurance was often in the form of a credit default swap provided by our favorite government agency – AIG. Before it jumped into the taxpayers arms for help that is.

So: the super smart folks at Goldman, those titans of risk management and earners of mega millions, shoveled toxic investments onto other banks and investment companies like pension companies, and then turned around and bought insurance against the value of those investments. Just in case the value dropped. Not that they had any suspicion such a drop would happen … heavens no. Just in case. Well, just in case.

Blankfein’s avoidance of giving a straight answer when questioned about all this yesterday tells it all.

There’s something fishy yet to come out.

Couple this with the scandal brewing over the way in which AIG’s counter-parties were hastily reimbursed for any potential losses they could have suffered on the CDS’s they had bought from AIG, and we begin to smell a cover up. Or at least a monumental screw up. A lot of people, and not just Republican mischief makers, want to know why the Fed bailed those counter-parties out at face value and not at some reduced rate. Other insurers, like Ambac and MBIA, faced the same difficulties as AIG, and their counter-parties were forced to accept a big haircut. Why not AIG’s? I will give you a hint: Goldman had no business with either Ambac or MBIA. How about another hint: the chairman of the New York Fed is a Goldman Sachs person.

The point is this: banks buy CDS coverage or sell investments short all the time. This is no big deal when the investments in question are traded on open and easily accessed exchanges: everyone, including buyers of the investments can see who is doing what, and at what price. ‘Caveat emptor’, which is Blanfein’s defense, is appropriate.

But the market for those huge mortgage backed security packages is neither open nor easily accessed. It is tightly controlled and full of very murky, opaque transactions. They’re not called ‘dark pools’ for nothing. It is in this very private, and not at all public place, that Goldman and others were playing when they took out their AIG insurance. So for Blankfein to decry critics by saying that the buyers of Goldman’s toxic waste knew full well what they were getting into holds much less water than a similar claim would in a different market.

So the point becomes even more sharply focused: was that market rigged? Did Goldman [and the others] know the market was rigged? Did they understand that the investments they were selling would drop in value the instant they were sold? Was that knowledge the motivation for buying the insurance? Why did the Fed cover this all up by bailing out Goldman and the other counter-parties at 100% on the dollar?

Is this all legal?

I usually don’t fall for the paranoia that inevitably lurks beneath stories like this, but in this case the evidence is beginning to pile up. It looks very much as if the markets in which some very big and dodgy deals took place were biased sufficiently that we should properly call them rigged. At the very least we need to know why it was Goldman deserved to be paid out in full – from taxpayer money – rather than take a haircut. After all, using Blankfein’s own words: the investors playing in these markets are ‘big boys’, they should know the deal. They are responsible for doing their own homework. Especially in these murky markets.

So why, suddenly, is Goldman an exception to its own rule? Is it not a ‘big boy’?

Our focus on this episode would be lessened if it were not for the extraordinary sight of the self congratulation and self-adoration that now infects Wall Street just a year later. These people genuinely think they have ‘earned’ those bonuses.

From a rigged game?

Stay tuned.